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Cryptocurrencies forever changed the idea of personal finance and doing business. Over the years, they cause controversy, are criticized, give rise to crime, are accompanied by failures, and … make it possible to earn good money.
Despite its many advantages, digital money has several disadvantages. Naturally, they are common to all financial markets, but in the case of cryptocurrencies, the risks are doubled due to their specific features. What threatens those who choose bitcoin or other crypto coins and bitcoin signals as a tool for investment?
The first of them were created at the time of the advent of electronic payment systems. Now their counterparts are adapted to the cryptocurrency market and can be activated wherever such an opportunity arises. The most common methods for stealing crypto coins are:
- fake links (spoofing);
- phishing (unauthorized access to personal information).
Owners of digital money should be extremely vigilant and try to be one step ahead of malware – use reliable anti-virus protection, check all addresses and not follow suspicious links.
Cyberattacks are the second largest problem and a frequent occurrence in the world of developing cryptocurrencies. Cases of hacker attacks are becoming more common, and fraud methods are becoming more sophisticated. Bitcoin wallets and the large amounts that are traded on trading floors have become especially attractive to thieves. Cryptocurrency exchanges were repeatedly hacked, as a result of which many were closed due to bankruptcy.
The International Securities and Exchange Commission has confirmed that more than half of the platforms have faced cyber-attacks. For example, in 2016, due to an error in the code, hackers gained unauthorized access to digital wallets of DAO hedge fund participants and stole more than $ 150 million. Another well-known case: when hackers circumvented the security system and replaced the methods of user verification on the well-known Bitfinex exchange, then they stole $ 70 million.
Lack of legal framework and legal risks
The situation is exacerbated by the lack of an investor insurance system. They cannot claim damages, despite the fact that part of the exchanges is positioned and acts as virtual banks.
Bitcoins are intangible digital codes for which there are no property rights. If they are stolen from a virtual wallet, the owner can neither identify the thief. A similar situation occurs when transactions are carried out in the name of an unscrupulous party. And if bitcoins are invested in a company that went bankrupt, the owner will also not have the opportunity to return them, since the contract is concluded “with honesty and handshakes.”
However, investors have no choice but to conduct business with exchanges that do not have equity for insurance of losses, as with ordinary banks, whose activities are regulated by law.
No one offers cryptocurrency insurance, although many projects are under development.
Bankruptcy and closing of exchanges
Over the previous 5 years, about 48% of cryptocurrency exchanges have been closed, among which quite promising were present.
At the time of closing the sites, users did not have time to withdraw money from the accounts, which led to multimillion-dollar losses. And the reason for this was not always hacker attacks.
This is the main reason for the collapse and the urgent problem for most cryptocurrency exchanges. Many simply can’t provide enough money to stay afloat for a long time. According to Eric Voorhees, founder of ShapeShift:
And this is only a small part of what is required for the full functioning of the service.
Technical malfunctions in the sites where Bitcoin wallets are stored is a fairly common occurrence. Investors who have suffered losses cannot claim a refund regardless of whether the problem is caused by malicious actions by hackers or by the operator’s negligence in developing software.
No guarantee for damages
When conducting operations through the exchange, the user does not actually own the funds that are stored on his account – the assets are owned and controlled by the exchange. The site only provides access to them at the entrance to the system. Thus, the owner fully trusts his Bitcoin wallet to a third party, relying on the security measures that she takes to protect money.
Bitfinex users lost 36% of their assets due to a cyber attack. Later, the site was launched again, and in order to retain customers, it reimbursed the affected funds with BFX tokens (at a cost they were relevant to bitcoin at the time of hacking), and then bought them back.
After hacking in 2014, the MtGox exchange (Tokyo) went bankrupt, and also promised to compensate investors, but the situation has not yet been completely resolved.
Alas, such cases are isolated. Most investors who have lost crypto assets at other sites have never seen them.
Virtual Money Market Crash
No one can guarantee the success and durability of cryptocurrencies. On the one hand, they are accepted on a par with fiat money, and on the other, they are not subject to any control. They are not material, like the dollar or the euro, but there is the prospect that soon they can be withdrawn through an ATM and put in your pocket, like ordinary money. However, so far they exist only in virtual form and are used much less often than fiat currencies.
The value of digital coins naturally changes over time, but there is no guarantee that rapid growth at some point will not result in an equally rapid decline. Consequently, there is a likelihood of a return to zero in both the short and long term. Prices are volatile (which is confirmed by high volatility) and a depreciation can trigger almost any political or economic factor. And such events, as a rule, are very difficult to predict.
Volatility = Volatility
This point should be highlighted separately. When such volatility is observed, everyone begins to give advice on when it is better to buy and sell. Of course, ideas may be good, but it is better for inexperienced market participants to step aside and wait out so as not to lose everything at once. Digital coins can be a tool for generating high returns, but only in the hands of experienced investors.
The unpredictable jumps in the exchange rate are partly due to the limited release of the “king of cryptocurrencies” – 21 million bitcoins. Each of them is growing daily in price, increasing demand. As a result, this can lead to deflation. As more and more merchants start accepting bitcoin as payment, its value will decline.
Another point is decentralization. This is both an advantage and a disadvantage. Since there is no governing body, no one can maintain the minimum cost of digital currency. If most investors decide to abandon Bitcoin and “throw” a lot of coins into the market, then there is a risk that the rate will collapse.
The cryptocurrency market is unstable, as it is at the formation stage. It requires special knowledge and skills, which are often incomprehensible to beginners. Although high volatility may seem attractive for investment, there are numerous “gaps” in this completely new area.
Loss of secret code
This is the key to access the bitcoin wallet. Loss of code means the loss of all assets that are stored in the wallet. This can happen if the PC hard drive fails or the flash drive on which the code is written is damaged. According to statistics, this happens with 25% of crypto-wallet owners who have lost about $ 18 billion. It is impossible to restore the code and return the money.
To summarize this long list
Cryptocurrency is unstable, is not regulated by anyone, does not guarantee investor protection, is subject to extreme volatility and is extremely attractive to scammers. The prospects for virtual earnings can be as airy as the currency itself. Therefore, anyone who invests in bitcoin or carries out transactions with cryptocurrencies is required to first take into account the risks in order to take the necessary measures. Only an integrated approach will help protect funds effectively.